Recently, urged on by a particular reference while indulging in a favourite pastime, reading, searched and downloaded from the internet, a paper by Fredric Bastiat, apparently written in 1850 and titled, "That Which is Seen, and That Which is Not Seen". While at first blink it does not appear to be a very imaginative title, but reading the article one realises the brilliance therein; and to say that the paper itself is an interesting read will be a gross understatement.
Bastiat was a liberal theorist, even, perhaps, before the phrase was invented, writing in 1850, and rather succinctly, about the perils of Big Government. His writings, in fact, provoke curiosity about whether or not Keynes had read them before postulating the latter's theories about public works spending during recession; reading one after the other, someone was pretty misguided!
It is rather amusing that even back then, in 1850, there were both kinds of economists, good and bad; something's never change, or maybe they do, there don't seem to be any good ones around now days! Anyway, puns aside, according to. Bastiat the bad only take account of the effects that can be seen while the good have the foresight to take cognisance, while forming policy decisions, of that which is not seen. In summary, what this means is that whatever that the government does, despite of the visible present benefits of its actions, there is always another effect, perhaps in the future, which can have a negative impact. And for Clint Eastwood fans, the negative impact is the Ugly!
The best illustration of this philosophy, which is closer to heart, in fact the pocket, is the case for lower taxation. The argument is that every rupee that the government expropriates from its citizens in the form of taxes, and spends on itself, is a rupee which the citizen has less off to spend. And while both might be spending the same rupee, it may not have the same utility for the economy; as Bastiat very pertinently asks, "Whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation?"
The insinuation is towards government's largesse, the excessive expenditure spent upon maintaining a façade, the lavish banquets, the army of assistants, the palatial offices, all deemed necessary to enforce the writ of the state; is not the public a better judge of the utility it derives from a rupee spent. What is not seen is that the rupee spent by the populace will be better spent in terms of utility and hence the growth of the economy. Considering the logic of this argument, wonder why IMF continues to argue Pakistan's low tax-to-GDP ratio. Quite contrary, Pakistan should be lauded as the country most successful in trying to eliminate big government!
In fact, if Bastiat's insight are adopted by the Pakistan Government, a handful of ministries, specifically those dealing with culture, tourism, sports and the likes, will entirely become redundant; a case for even lower taxes. If the public is not interested in any traditional form of art, does it have a right to survive; the rupee spent on sustaining any form of dying culture is a rupee less for the country's poor. And who decides, whether the former or the latter deserves the rupee more; the government or the people?
In fact, any kind of subsidy can be questioned under this doctrine. For instance, the amount spent on subsidising power takes away the rupees that could have been spent on people who are devoid of this luxury; for the moment ignoring load shedding. Why should this money not be spent on clean water for the poor at the bottom? On the other hand the government should not bloat fuel prices and balance its budget; the rupee left in the hands of the populace could very well be spent more productively.
The above brings the debate to the much argued role of the government. In its minimal form, government's job is enforcement of contracts, protection of property rights, ensuring civil order, police and judiciary, defence of the nation, redistribution of income and public works. Serendipitously, this is perhaps the implicit meaning of the popular motto, repeatedly roared in the corridors of power; government's business is not to do business. While the use of this motto is limited to provide justification for the government's privatisation programme, it could also be used to question spending on public works.
In his paper, Bastiat seems extremely irked by the argument that spending on public works crates employment. According to him what is not seen is that this deprives certain other workmen out of work. In a country of limited resources, especially capital and equipment, that appears prescient. Recently someone pointed out that governments should only undertake projects which pay one percent more; but if a project was profitable in the first place, would it not be better left to the private sector? The argument calls into question the wisdom of spending on a mega project for a particular segment of the society, while the majority is devoid of basic infrastructure.
An even more striking anomaly is the various government guarantees and subsidies provided for capacity utilisation and revenues. If a project is not feasible stand alone, is it good business to develop, build and operate it on an artificial life support system?; especially when it is not even the Government's business to be in business. The readers should by now be questioning the exactitude of this argument, which is exactly the point. It is not that Public works aren't a necessary role of the government, but if subsidising is taken for granted, it will color the investment decision from what it should truly be.
Fundamentally, in its extreme form, a laissez-faire economy even challenges the income redistribution role of the government, on the premise that why should the hardworking be made to pay for the well, not so hardworking. Perhaps this is the junction to agree to disagree with Bastiat. After all, a society which cannot protect and provide for its underprivileged can never be classified as a civilised society. Admittedly the balance between completely free market economies, if there can ever be one in the real sense, and fully planned ones , communism be as it may, remains elusive. Personally, this balance is a moving target and continues to shift as nations migrate from underdeveloped, to developing all the way to a developed economy. Meaning, a developing nation will require comparatively larger government intervention than a developed nation.
In retrospect, the right amount of Government is a frugal one which is conscious of its role as a public servant, rather than being enamoured with the absolute power of the State. But "They" just don't want to see that, for if that was the case, what would be the fun in being in the government at all!
(The writer is chartered accountant based in Islamabad)
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